Why consumers shouldn’t worry about the new solar tariffs

The federal government’s decision yesterday to slap fairly hefty tariffs on Chinese solar panels has prompted worries about a big rise in costs for consumers to go solar. But the impact will not likely be as significant for two reasons: any price increase will be absorbed along the way by everyone from manufacturers to installers, and the growing competition in the retail solar market will keep the cost to consumers in check.

The Department of Commerce’s decision determined that Chinese companies have indeed been selling products at below fair market prices, and the ruling addressed part of a broader trade complaint filed by SolarWorld and other manufacturers last October. To offset the impact of the below-market pricing, the commerce department reached a preliminary ruling to impose an import tariff of about 31 percent on solar cells from 61 Chinese manufacturers and nearly 250 percent for the rest.

It’s worth noting that the tariffs will affect only silicon solar cells made in China but not solar panels made in China with silicon solar cells from another country. Plus, the commerce department could modify the tariffs when it issues a final decision in October.

Paper tiger

The 250 percent tariff sounds scary, but the fact is the biggest Chinese solar companies such as Suntech Power, Trina Solar, Yingli Green Energy and Canadian Solar will face the 31 percent tariff. While that 31 percent tariff will likely raise the wholesale prices, there are ways to manage it.

For months Chinese manufactures have been brainstorming around ways to lessen the impact of any tariffs. They have been talking to solar cell makers in Taiwan about buying and shipping their cells to China or elsewhere to be assembled into panels. A company like Canadian Solar, for example, could buy Taiwanese solar cells and assemble them in its Canadian factory (most of the company’s manufacturing is in China, hence it’s considered a Chinese company) or hire a manufacturer in Korea. Chinese companies also could set up solar cell production outside of China.

Shyam Mehta, a senior analyst at GTM Research, estimated that hiring Taiwanese companies to make cells will increase production costs for Chinese companies by 6 percent to 12 percent, which “is meaningful but manageable.”

Solar installers

While manufacturers figure out their strategies, solar service providers – from companies that provide consumer financing to roofers who install solar panels – need to come up with plans to cope with higher solar panel prices. People in the solar retail sector, understandably, have strongly opposed the trade complaint. They contend that the solar market growth could slow if they have to pay more for solar panels.

Certainly, profits will shrink if costs increase. But that doesn’t mean retail service providers will raise their prices or raise by a whole lot. They will likely absorb the added costs and still make good money, especially by increasing the sales volumes (the solar market is hardly saturated). We are not talking about razor-thin margins that will be rendered non-existent by the tariffs.

For a while now, investors and solar retail service providers have talked about how they could deliver or receive very good (double digit) and long-term returns. We’ve seen banks and other types of investors such as Google putting up funds in hundreds of millions to finance leases and power purchase agreements, which are long-term contracts in which consumers pay a monthly fee for solar electricity instead of the high upfront cost of installing and owning solar panels. Consumers opt for these financing plans because they take away the hassles of doing research and picking equipment manufacturers, and because they are often promised lower utility bills. That promise of lower utility bills is a key selling point, and any solar retailer who took that away will lose a serious competitive edge.

Competition in the retail sector has intensified in recent years, and that, too, will make it difficult to raise prices and still compete effectively. Venture-backed startups such as Sungevity, SolarCity and Sunrun started in 2006 or 2007 and have expanded well beyond their home turf of California. Many more have shown up and some of them that first made their fortunes in a different business, such power company NRG Energy, home security company Vivint and roof installer PetersenDean. Consumers only benefit when they have more companies to choose from.

Lastly, solar panels don’t make up the bulk of the price of a solar electric system. In fact, they take up around 20 percent, and the rest comes from the costs of other components, sales and marketing, permits and labor. A bigger worry for installers has been these non-solar panel costs, particularly in permitting and marketing and sales. The average price for a residential system by the end of last year was just over $6 per watt (and less $5 per watt if a homeowner bought a system outright rather than doing a lease), GTM said, while the wholesale price for solar panels was near $1 per watt (it was $1 per watt when I caught up with Chinese solar panel makers at PV America West in March). UPDATE: Solar panel prices fell around 50 percent in 2011 while the average price for a residential system dropped 3.6 percent during that time.

The solar industry wants to show critics that solar electricity can be affordable and compete with power from fossil fuels and it deserves government subsidies to help reduce costs. To raise prices in a big way will only give ammunition to critics that solar is far from prime time. That’s one outcome everyone in the solar industry, regardless of which side they are on in the trade dispute, would hate to see.